Oil patch earnings season will bring more red ink

Today, earnings will start to flow from the energy sector. Generally speaking they're expected to be better than they were in the winter quarter, but that's not saying much.

Red ink will continue to be a major theme, but it won't bethe only theme. The impact the Fort McMurray wildfires had on production will be key for oilsandscompanies, and as importantly, analysts will be watching to see if there's any confidence in oil at least maintaining current levels.

• Alberta recession one of the most severe ever, TD Economics report finds
• Oil downturn leads to rise in underground contractors
• Precision Drilling Q2 loss doubles as revenue falls by half
• Encana loses $601M US in 2nd quarter

"You'll see some strong improvement in Q2 over Q1," said Martin Pelletier, a portfolio manager with Trivest Wealth Counsel

"You had oil up 48 or49per cent. Natural gas was up 31 per cent, that's going to reflect in some pretty good top-line revenue numbers."

Refining margins were also strong in the quarter.That will help the big so-called integrated companies, such as Imperial Oil and Suncor, which refine oil and sell gasoline. In a research report, BMO Capital Markets analyst Randy Ollenbergernoted that refining margins in Canada were above $40 a barrel.

Impact of the wildfires

But then there are the wildfires that ragedthrough the Fort McMurray region in May, taking as much as 1.5 million barrels a day of supply off the market.

As a result,Ollenberger wrote that he expects the production of four key oilsands players:Suncor, Cenovus, Husky, and Imperial Oilto be lower by 25 per cent in the quarter. Ollenberger expects all but Imperial to post a loss and forecaststhat Imperial will break even in the quarter. Notably, Ollenberger is expecting oilsandsnumbers to improveover the first quarter of the year, when oil hit a low of $26 US a barrel.

• Tallying Alberta's oil revenue losses from Fort McMurray wildfires
• Oil prices jump as Fort McMurray wildfire slows down oilsands production

It was, of course, the production cuts resulting from the fires that helped to boost the price of oil, the very definition of cold comfort.

Outside of the oilsands, the picture is brighter, with the large majority of senior producers able to take advantage of higher prices without the pain of production cuts.

But what's next?

However, Pelletier pointed out that the market prefers to look forward, not backward, so the focus will be on what comes next. Will oil prices manage to stay above $40 US a barrel, or will they sink again?

In the past two springs, oil topped out in late spring, and then fell sharply as the summer driving season came to an end. In 2014, the situation was made worse by OPEC's decision to turn on the taps. Those taps are still turned on maximum.

• Oil price rally prompts hope and skepticism
• Oil at $50: What life looks like in the oilpatch 2 years after prices plummeted

According to the International Energy Agency, oil production in the Middle East has been above a record 31 million barrels a day for three months, offsetting, at least in part, the drop in U.S. production. The IEA still thinks that the market will be in balance in this half of 2016.

Pelletier counts himself as bear onoil at the moment. He said he will be watching to see if energy companies chose to hedge (or presell their oil) when oil prices were high, whether they are continuing with cost cutting, or possibly increasing spending.

"I think the risks are certainly more to the downside, the question is: are companies sharing that same view, or are they optimistic?"

• Calgary-based AltaGas slashes 70 positions to save $7M a year